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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 000-22347
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ASCENT PEDIATRICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-3047405
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
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(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
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None
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(Former name, former address, and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate number of shares outstanding of the registrant's Common
Stock, par value $.00004 per share, as of May 5, 1999: 7,026,445.
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ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
PAGE
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Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
Unaudited Condensed Balance Sheets ..................... 1
Unaudited Condensed Statements of Operations ........... 2
Unaudited Statements of Comprehensive Loss ............. 2
Unaudited Condensed Statements of Cash Flows ........... 3
Notes to Unaudited Condensed Financial Statements ...... 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 8
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk............................................. 14
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-k ....................... 14
Signature .................................................................. 15
Exhibit Index .............................................................. 16
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PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................................. $ 2,267,976 $ 2,171,777
Accounts receivable, net .................................................. 1,490,892 918,307
Inventory, net ............................................................ 698,824 919,785
Other current assets ...................................................... 421,923 274,983
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Total current assets ................................................. 4,879,852 4,284,852
Fixed assets, net .............................................................. 660,706 730,894
Debt issue costs, net .......................................................... 582,478 606,092
Intangibles, net ............................................................... 10,358,959 10,523,789
Deferred charges ............................................................... 716,231 63,760
Other assets ................................................................... 65,046 91,543
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Total assets ......................................................... $ 17,263,035 $ 16,300,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable .......................................................... $ 2,403,282 $ 1,510,193
Accrued expenses .......................................................... 2,155,241 2,306,243
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Total current liabilities ............................................ 4,558,423 3,816,436
Subordinated secured notes ..................................................... 12,693,885 8,681,474
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Total liabilities .................................................... 17,252,408 12,497,910
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized; 7,000
shares, designated as Series G convertible exchangeable
preferred stock, issued and outstanding at March 31, 1999 and
December 31, 1998 (liquidation preference of $7,000,000) ............. 6,461,251 6,461,251
Common stock, $.00004 par value; 60,000,000 shares authorized;
7,026,445 and 6,975,921 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively ................... 280 279
Additional paid-in capital ................................................ 47,835,662 47,951,271
Accumulated deficit ....................................................... (54,286,566) (50,609,781)
------------ ------------
Total stockholders' equity ........................................... 10,627 3,803,020
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Total liabilities and stockholders' equity ........................... $ 17,263,035 $ 16,300,930
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
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<S> <C> <C>
Product revenue, net ................................. $ 1,241,399 $ 1,314,049
Co-promotional revenue ............................... 615,000 --
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Total net revenue .................................... 1,856,399 1,314,049
Costs and expenses
Cost of product sales ........................... 634,594 553,680
Selling, general and administrative ............. 4,115,095 3,764,832
Research and development ........................ 578,303 1,123,878
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Total costs and expenses ........................ 5,327,992 5,442,390
Loss from operations ....................... (3,471,593) (4,128,341)
Interest income ...................................... 25,897 158,822
Interest expense ..................................... (231,089) (471,313)
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Net loss ................................... (3,676,785) (4,440,832)
Preferred stock dividend ............................. 192,501 --
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Net loss to common stockholders ............ $(3,869,286) $(4,440,832)
=========== ===========
Results per common share:
Historical - basic and diluted:
Net loss ................................... $ (0.52) $ (0.64)
=========== ===========
Preferred stock dividend ................... $ (0.03) $ --
=========== ===========
Net loss to common stockholders ............ $ (0.55) $ (0.64)
=========== ===========
Weighted average shares outstanding .................. 7,010,821 6,910,414
=========== ===========
</TABLE>
UNAUDITED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
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<S> <C> <C>
Net loss ............................................. $(3,676,785) $(4,440,832)
Unrealized gain on securities ........................ -- 1,762
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Comprehensive loss ................................... $(3,676,785) $(4,439,070)
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1999 1998
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<S> <C> <C>
Cash flows for operating activities:
Net loss ......................................................... $(3,676,785) $ (4,440,832)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization ............................... 272,294 293,365
Non-cash interest expense ................................... 12,411 325,480
Provision for bad debts ..................................... 14,801 --
Changes in operating assets and liabilities:
Accounts receivable ..................................... (587,387) (67,643)
Inventory ............................................... 220,961 (302,665)
Other assets ............................................ (120,443) (341,785)
Accounts payable ........................................ 893,090 (36,893)
Accrued expenses ........................................ (343,503) (39,367)
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Net cash used for operating activities ............. (3,314,561) (4,610,340)
Cash flows used for investing activities:
Purchase of property and equipment ............................... (13,662) (132,548)
Payment related to acquisition ................................... -- (5,500,000)
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Net cash used for investing activities ............. (13,662) (5,632,548)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs ................................................. 76,893 59,568
Proceeds from issuance of debt ................................... 4,000,000 --
Cash paid for deferred charges ................................... (652,471) --
Repayment of debt ................................................ -- (875,000)
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Net cash provided by financing activities .......... 3,424,422 (815,432)
Net (decrease) increase in cash and cash equivalents .................. 96,199 (11,058,320)
Cash and cash equivalents, beginning of period ........................ 2,171,777 11,700,612
----------- ------------
Cash and cash equivalents, end of period .............................. $ 2,267,976 $ 642,292
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest .................................................... $ -- $ 153,125
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), formerly Ascent
Pharmaceuticals, Inc., incorporated in Delaware on March 16, 1989, is a drug
development and marketing company focused exclusively on the pediatric market.
Since its inception, until July 9, 1997, the Company operated as a development
stage enterprise devoting substantially all of its efforts to establishing a new
business and to carrying on development activities. On July 10, 1997, the
Company completed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. ("Upsher-Smith"), pursuant to
an Asset Purchase Agreement dated as of March 25, 1997 (the "Asset Purchase
Agreement") between the Company and Upsher-Smith and subsequently commenced
sales of the Feverall line of products. In October 1997, the Company also
commenced sales of Pediamist nasal saline spray. During March 1998, the Company
began marketing Duricef(R) (cefadroxil monohydrate) to pediatricians in the
United States pursuant to a co-promotion agreement with Bristol-Myers Squibb
U.S. Pharmaceuticals Group. The Company terminated this co-promotion agreement
effective December 31, 1998. During February 1999, the Company began marketing
Omnicef(R) (cefdinir) oral suspension and capsules to pediatricians in the
United States pursuant to a promotion agreement with Warner-Lambert Company.
The Company has incurred net losses since its inception and expects to
incur additional operating losses in the future as the Company continues its
product development programs, growth of its sales and marketing organization and
introduces its products to the market. The Company is subject to a number of
risks similar to other companies in the industry, including rapid technological
change, uncertainty of market acceptance of products, uncertainty of regulatory
approval, limited sales and marketing experience, competition from substitute
products and larger companies, customers' reliance on third-party reimbursement,
the need to obtain additional financing, compliance with government regulations,
protection of proprietary technology, dependence on third-party manufacturers,
distributors, collaborators and limited suppliers, product liability, and
dependence on key individuals.
2. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The interim financial statements
include, in the opinion of management, all adjustments (consisting of normal and
recurring adjustments) that are necessary for a fair presentation of the results
for the interim periods ended March 31, 1999 and 1998. The results for the
interim periods presented are not necessarily indicative of results to be
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expected in the full fiscal year. Certain prior period items have been
reclassified to conform with the current quarter presentation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
Options, warrants, preferred stock and debt to purchase or convert to
2,040,219 and 1,679,164 shares of common stock outstanding as of March 31, 1999
and 1998, respectively, were not included in the computation of diluted net loss
per common share because the Company is in a loss position, and the inclusion of
such shares, therefore, would be antidilutive.
Similarly, options and warrants to purchase or convert to 2,382,153 and
982,195 shares of common stock outstanding as of March 31, 1999 and 1998,
respectively, were not included in the computation of diluted net loss per
common share because the options and warrants have exercise prices greater than
the average market price of the common shares and, therefore, would be
antidilutive under the treasury stock method.
4. INVENTORIES
Inventories are stated at the lower of cost or market using the first in,
first out (FIFO) method and consist of the following:
March 31, December 31,
1999 1998
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Raw materials............................ $191,033 $248,434
Finished goods .......................... 507,791 671,351
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Total......................... $698,824 $919,785
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INTANGIBLE ASSETS
Intangible assets consist of goodwill, patents, trademarks, and a
manufacturing agreement and are being amortized using the straight-line method
over useful lives of fifteen to twenty years. The Company periodically reviews
the propriety of carrying amounts of its intangible assets as well as the
amortization periods to determine whether current events and circumstances
warrant adjustment to the carrying value or estimated useful lives. This
evaluation compares the expected future cash flows against the net book values
of related intangible assets. If the sum of the future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company shall recognize an impairment loss as a charge to operations.
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ACCRUED EXPENSES
Accrued expenses consisted of the following:
March 31, December 31,
1999 1998
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Employee compensation expenses.......... $ 664,426 $ 762,664
Advertising expenses.................... 80,149 183,509
Legal and accounting expenses........... 62,882 114,441
Selling fees and chargebacks............ 190,841 254,632
Interest payable........................ 394,270 208,862
Preferred stock dividend................ 499,316 306,815
Other................................... 263,357 475,320
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Total.......................... $2,155,241 $2,306,243
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7. ALPHARMA STRATEGIC ALLIANCE
On February 16, 1999, the Company entered into a series of agreements with
Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD Inc. ("Alpharma").
This strategic alliance contemplates a number of transactions, including a loan
agreement under which Alpharma will loan Ascent up to $40.0 million from time to
time, $12.0 million of which may be used for general corporate purposes and
$28.0 million of which may only be used for specified projects and acquisitions
intended to enhance the Company's growth. In addition, the Company will obtain a
call option to acquire all of its outstanding common stock and assign the option
to Alpharma, thereby giving Alpharma the option, exercisable in 2002, to
purchase all of the Company's common stock then outstanding at a purchase price
to be determined by a formula based on the Company's 2001 earnings. The
consummation of the strategic alliance is subject to the approval of the
Company's stockholders, at a meeting expected to be held on June 29, 1999, of a
proposed merger between the Company and Bird Merger Corporation, a wholly-owned
subsidiary of the Company, which merger will result in the creation of the call
option.
On February 19, 1999, the Company borrowed $4.0 million from Alpharma
under the loan agreement and issued Alpharma a 7.5% convertible subordinated
note in the principal amount of up to $40.0 million. Alpharma's obligation to
loan the Company the balance of the $40.0 million is subject to the approval of
the strategic alliance by the Company's stockholders. If the Company's
stockholders do not approve the strategic alliance, the Company must immediately
repay the outstanding principal and interest on the note. The other principal
terms of the Alpharma note are set forth below.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at a
rate of 7.5% per annum. Interest is due and payable quarterly, in arrears on the
last day of each calendar quarter. If the call option terminates or expires, the
Company does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, the Company will repay the
outstanding principal amount under the note over a 15 month period commencing
March 30, 2004 and ending June 30, 2005.
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PREPAYMENT. On or before June 30, 2001, the Company may repay all or a
portion of the outstanding principal amount due under the note. The Company may
re-borrow any repaid amounts on or before December 31, 2001. At any time after
the expiration or termination of the call option and on or before December 31,
2002, the Company may prepay all of the outstanding principal amount under the
note, together with any accrued and unpaid interest, if it also pays a
conversion termination fee equal to 25% of the principal amount of the note
outstanding as of December 31, 2001. The Company may not otherwise prepay the
note. Following a change in control of the Company, Alpharma may require the
Company to repay all outstanding principal and interest under the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into common stock of the Company on one occasion
after a change in control of the Company and at any time after December 31, 2002
at a conversion price of $7.125 per share (subject to adjustment). After January
1, 2003 and on or before February 28, 2003, Alpharma may cause the Company to
borrow all remaining amounts available under the loan agreement (increasing the
principal amount of the note to $40.0 million), but only if Alpharma converts
all of the principal amount of the note into common stock of the Company within
three business days after the increase.
In connection with the Company's strategic alliance with Alpharma, the
Company entered into a second amendment to the May 1998 Series G Purchase
Agreement, providing for, among other things, (a) the Company's agreement to
exercise its right to exchange all outstanding shares of Series G preferred
stock for convertible subordinated notes in accordance with the terms of the
Series G preferred stock, (b) subject to stockholder approval, the reduction in
the exercise price of warrants to purchase 2,116,958 shares common stock of the
Company from $4.75 per share to $3.00 per share and the agreement of the Series
G purchasers to exercise these warrants, (c) the issuance and sale to the Series
G purchasers of an aggregate of 300,000 shares of common stock of the Company at
a price of $3.00 per share and (d) the cancellation of approximately $7.25
million of principal under the subordinated notes held by the Series G
purchasers to pay the exercise price of the warrants and the purchase price of
the additional 300,000 shares of common stock. In addition, the Company entered
into an amendment to a financial advisory services fee agreement with ING Furman
Selz whereby the Company agreed to issue 150,000 shares of common stock to ING
Furman Selz in lieu of the payment of certain financial advisory fees. The
reduction in the exercise price of the warrants and the issuance of the
additional shares of common stock to the Series G purchasers and ING Furman Selz
are also subject to stockholder approval.
DEFERRED CHARGES. Also in connection with the Company's strategic alliance
with Alpharma, the Company has incurred $716,000 in legal, accounting and
consulting fees. These fees have been capitalized on the balance sheet as
deferred charges and are being amortized over the life of the debt.
These transactions will be consummated, subject to stockholder approval,
concurrently with the closing of the transactions contemplated by the Master
Agreement, dated as of February 16, 1999, by and among the Company, Alpharma and
Alpharma, Inc., including the merger of the Company with Bird Merger
Corporation, a wholly-owned subsidiary of the Company, in
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accordance with the Agreement and Plan of Merger, dated as of February 16, 1999,
by and between the Company and Bird Merger Corporation.
8. SUBSEQUENT EVENTS
Pediotic
In April 1999, the Company entered into a one-year co-promotion agreement
with King Pharmaceuticals, Inc., to begin marketing, in May 1999, Pediotic(R) (a
combination corticosteroid/antibiotic) to pediatricians in the United States. As
compensation for the Company's co-promotional efforts, King Pharmaceuticals has
agreed to pay the Company a base fee with incremental revenue based on achieving
certain goals above a specified amount.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Ascent is a drug development and marketing company focused exclusively on
the pediatric market. Ascent commenced operations in March 1989 and prior to the
quarter ended September 30, 1997 was engaged primarily in developing its
products and product candidates and in organizational efforts, including
recruiting scientific and management personnel and raising capital. Ascent
introduced its first product, Feverall acetaminophen suppositories, during the
quarter ended September 30, 1997 and its second product, Pediamist nasal saline
spray, during the quarter ended December 31, 1997. During the quarter ended
March 31, 1998, the Company began marketing Duricef(R) (cefadroxil monohydrate)
to pediatricians in the United States pursuant to a co-promotion agreement with
Bristol-Myers Squibb U.S. Pharmaceuticals Group. The Company terminated this
co-promotion agreement effective December 31, 1998. During the quarter ended
March 31, 1999, Ascent began marketing Omnicef(R) (cefdinir) oral suspension and
capsules to pediatricians in the United States pursuant to a promotion
agreement with Warner-Lambert Company.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least through 1999 as it continues its product
development programs, maintains its sales and marketing organization and
introduces products to the market. Ascent expects cumulative losses to increase
over this period. Ascent has incurred a deficit from inception through March 31,
1999 of $54,287,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
REVENUE: Ascent had total net revenue of $1,856,000 for the three months
ended March 31, 1999 compared with revenue of $1,314,000 for the three months
ended March 31, 1998. This increase in revenue of $542,000 was primarily
attributable to an increase in co-promotional revenue of $615,000.
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COST OF PRODUCT SALES: Cost of product sales was $635,000 for the three
months ended March 31, 1999 compared with $554,000 for the three months ended
March 31, 1998. This increase in cost of product sales of $81,000 was primarily
the result of (i) an increase of $56,000 for the manufacturing cost associated
with the production of the Feverall and Pediamist due to an increase in
shipments, and (ii) an increase of $24,000 in manufacturing support personnel
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling,
general and administrative expenses of $4,115,000 for the three months ended
March 31, 1999 compared with $3,765,000 for the three months ended March 31,
1998, representing an increase of $350,000.
Selling and marketing expenses were $3,005,000 for the three months ended
March 31, 1999 compared with expenses of $2,662,000 for the three months ended
March 31, 1998. This increase in selling and marketing expenses of $343,000 was
primarily the result of an increase of $445,000 in personnel costs due to an
increased number of sales representatives. This was offset by a decrease in
consulting expenses of $105,000 associated with the Company's election not to
renew consulting arrangements that were in effect during the first quarter of
1998.
General and administrative expenses were $1,110,000 for the three months
ended March 31, 1999 which was consistent with $1,103,000 for the three months
ended March 31, 1998.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development
expenses of $578,000 for the three months ended March 31, 1999 compared with
$1,124,000 for the three months ended March 31, 1998. The decrease of $546,000
was primarily due to (i) $437,000 in reduced spending on the Primsol and
Pediavent products' R&D programs due to the completion of clinical and
biological studies of these products during the first quarter of 1998 and (ii)
$56,000 in reduced personnel costs due to a reduction in the number of R&D
personnel.
INTEREST: Ascent had interest income of $26,000 for the three months ended
March 31, 1999 compared with interest income of $159,000 for the three months
ended March 31, 1998. This decrease of $133,000 was primarily due to a lower
average cash investment balance. Ascent had $231,000 in interest expense for the
three months ended March 31, 1999 compared to $471,000 for the three months
ended March 31, 1998, a decrease of $240,000. This decrease was the result of
the issuance of subordinated notes in connection with the sale of shares of
Ascent Series G preferred stock and the use of the proceeds to repay the Triumph
subordinated secured notes on June 1, 1998. The subordinated notes issued in
connection with the shares of Ascent Series G preferred stock have a lower
effective interest rate than the Triumph subordinated secured notes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from
private sales of preferred stock, the private sale of subordinated secured notes
and related common stock purchase warrants and, in 1997, an initial public
offering of shares of common stock. As of March 31, 1999, Ascent had raised
approximately $33,560,000 (net of issuance costs) from the sales of preferred
stock, approximately $18,027,000 (net of issuance costs and deferred charges)
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from the issuance of subordinated secured notes and related warrants and
approximately $17,529,000 (net of issuance costs) from the initial public
offering of 2,240,000 shares of common stock. In addition, in the second half of
1997, Ascent began shipping its first two products, Feverall acetaminophen
suppositories and Pediamist nasal saline spray, and in February 1999 began
promoting Omnicef(R) pursuant to a promotion agreement with Warner-Lambert
Company.
ALPHARMA STRATEGIC ALLIANCE. On February 16, 1999, Ascent entered into a
series of agreements with Alpharma, Inc. and its wholly-owned subsidiary,
Alpharma USPD Inc. ("Alpharma"). This strategic alliance contemplates a number
of transactions, including a loan agreement under which Alpharma will loan
Ascent up to $40.0 million from time to time, $12.0 million of which may be used
for general corporate purposes and $28.0 million of which may only be used for
specified projects and acquisitions intended to enhance Ascent's growth. In
addition, subject to stockholder approval, Ascent will obtain a call option to
acquire all of its outstanding common stock and assign the option to Alpharma,
thereby giving Alpharma the option, exercisable in 2002, to purchase all of the
Ascent common stock then outstanding at a purchase price to be determined by a
formula based on Ascent's 2001 earnings.
On February 19, 1999, Ascent borrowed $4.0 million from Alpharma under the
loan agreement and issued Alpharma a 7.5% convertible subordinated note in the
principal amount of up to $40.0 million. Alpharma's obligation to loan Ascent
the balance of the $40.0 million is subject to the approval of Ascent's
stockholders of a proposed merger between Ascent and Bird Merger Corporation,
which approval is a condition to the consummation of the strategic alliance. If
Ascent's stockholders do not approve the merger, Ascent must immediately repay
the outstanding principal and interest on the note.
In connection with Ascent's strategic alliance with Alpharma, Ascent
entered into a second amendment to the May 1998 securities purchase agreement
with ING Furman Selz. The second amendment provides for, among other things, (a)
Ascent's agreement to exercise its right to exchange all outstanding shares of
Series G preferred stock for convertible subordinated notes in the original
principal amount of $7.0 million in accordance with the terms of the Series G
preferred stock, (b) the reduction in the exercise price of warrants to purchase
2,116,958 shares of Ascent common stock from $4.75 per share to $3.00 per share
and the agreement of the Series G purchasers to exercise these warrants, (c) the
issuance and sale to the Series G purchasers of an aggregate of 300,000 shares
of Ascent common stock at a price of $3.00 per share and (d) the cancellation of
approximately $7.25 million of principal under the subordinated notes held by
the Series G purchasers to pay the exercise price of the warrants and the
purchase price of the additional 300,000 shares. In addition, Ascent entered
into an amendment to a financial advisory services fee agreement with ING Furman
Selz under which Ascent agreed to issue 150,000 shares of Ascent common stock to
ING Furman Selz in lieu of the payment of certain financial advisory fees.
Ascent's obligation to consummate these transactions with the holders of Series
G preferred stock and with ING Furman Selz is subject to the approval of
Ascent's stockholders.
FUTURE CAPITAL REQUIREMENTS. Ascent's future capital requirements will
depend on many factors, including the costs and margins on sales of its
products, success of its commercialization activities and arrangements,
particularly the level of product sales, its ability to acquire and
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successfully integrate business and products, continued progress in its product
development programs, the magnitude of these programs, the results of
pre-clinical studies and clinical trials, the time and cost involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting,
enforcing and defending patent claims, competing technological and market
developments, the ability of Ascent to maintain and, in the future, expand its
sales and marketing capability and product development, manufacturing and
marketing relationships, and the ability of Ascent to enter into and maintain
its promotion agreements. Ascent's business strategy requires a significant
commitment of funds to engage in product and business acquisitions, to conduct
clinical testing of potential products, to pursue regulatory approval of such
products and maintain sales and marketing capabilities and manufacturing
relationships necessary to bring such products to market.
Ascent anticipates, based upon its current operating plan, that (a) its
existing capital resources and internally generated funds should satisfy its
capital requirements into June 1999 and (b) it will require approximately $10.0
million of additional funds beyond that to meet its capital requirements through
the first quarter of 2000. Ascent is currently in discussions to obtain bridge
financing to fund its capital requirements until the annual meeting of
stockholders, at which time the Company expects that, subject to stockholder
approval of the strategic alliance with Alpharma, it will be able to satisfy its
capital requirements with funds borrowed from Alpharma under the Loan Agreement
dated February 16, 1999 by and among Ascent, Alpharma and Alpharma, Inc.,
including the remaining $8.0 million which Ascent may borrow from Alpharma for
general corporate purposes under the loan agreement. If Ascent's stockholders do
not approve the merger with Alpharma or if Ascent does not consummate the
strategic alliance with Alpharma, Ascent must immediately repay the $4.0 million
borrowed from Alpharma on February 19, 1999 plus interest and will need to raise
additional funds, including through collaborative relationships and public or
private financings. In addition, if Ascent's business does not progress in
accordance with its current operating plan or Primsol or Orapred are not
approved when expected, the Company may need to raise additional funds. In any
case, additional financing may not be available to Ascent or may not be
available on acceptable terms. If adequate funds are not available, Ascent may
be required to significantly curtail one or more of its product development
programs or product commercialization efforts, obtain funds through arrangements
with collaborative partners or others that may require Ascent to relinquish
rights to certain of its technologies, product candidates or products which
Ascent would otherwise pursue on its own or significantly scale back or
terminate operations.
NASDAQ LISTING
On April 29, 1999, the Company received a notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") indicating that, because the Company was not in
compliance with the continued listing requirements of the Nasdaq National Market
as of December 31, 1998, Nasdaq was reviewing the Company's eligibility for
continued listing of Ascent Common Stock. On May 12, 1999, the Company provided
Nasdaq with its proposal for achieving compliance with the continued listing
requirements of the Nasdaq National Market. The Company is currently in
discussions with Nasdaq regarding the continued listing of Ascent Common Stock.
There can be no assurance that Nasdaq will accept the Company's proposal for
achieving compliance with the
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continued listing requirements or that the Company's Common Stock will continue
to be listed on the Nasdaq National Market.
IMPACT OF YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Following December
31, 1999, Ascent's computer equipment and software that is time sensitive,
including equipment with embedded technology such as telephone systems and
facsimile machines, may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to engage in normal business activities.
Ascent is in the process of assessing its computer systems, software and
operations infrastructure, including systems being developed to improve business
functionality, to identify computer hardware, software and process control
systems that are not Year 2000 compliant. To this end, during the third quarter
of fiscal 1998, Ascent established an internal Year 2000 task force, comprised
of employees and members of management, for the purpose of evaluating the Year
2000 compliance of its existing computer systems, software and operations
infrastructure and any Year 2000 issues of third parties of business importance
to Ascent. The goal of Ascent's Year 2000 task force is to minimize any
disruptions to Ascent's business which could result from the Year 2000 problem
and to minimize liabilities which Ascent might incur as a result of such
disruptions. Ascent currently anticipates that its Year 2000 assessment efforts
will be completed by June 30, 1999.
Ascent has also initiated communications with its significant suppliers,
including Upsher-Smith Laboratories, Inc. and Lyne Laboratories, and service
providers and certain strategic customers to determine the extent to which such
suppliers, providers or customers will be affected by any significant Year 2000
issues. Although, as of March 31, 1998, Ascent has not received a significant
number of responses to its inquiries, Ascent believes that these communications
will permit Ascent to determine the extent to which it may be affected by the
failure of these third parties to address their own Year 2000 issues and may
facilitate the coordination of Year 2000 solutions between Ascent and these
third parties. Third parties of business importance to Ascent may not
successfully and timely evaluate and address their own Year 2000 issues. The
failure of any of these third parties to achieve Year 2000 compliance in a
timely fashion could have a material adverse effect on Ascent's business,
financial position, results of operations or cash flows.
Ascent is funding the costs of its Year 2000 compliance efforts with cash
flows from operations. Although Ascent has not completed the Year 2000
assessment of its computer systems and software, based upon its assessment
efforts to date, Ascent does not anticipate that the costs of becoming Year 2000
compliant will have a material adverse effect upon Ascent's business, financial
position, results of operations or cash flows. Ascent does not expect that the
costs of replacing or modifying computer equipment and software will be
substantially different, in the aggregate, from the normal, recurring costs
incurred by Ascent for systems development, implementation and maintenance in
the ordinary course of business. In this regard, in the
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ordinary course of replacing computer equipment and software, Ascent attempts
to obtain replacements that are Year 2000 compliant. For example, Ascent
upgraded its financial accounting software and received written representations
that the system was Year 2000 compliant. As of March 31, 1999, in addition to
the costs that Ascent would have incurred in the ordinary course of replacing
computer equipment and software, Ascent had incurred less than $5,000 for the
replacement of computer equipment and software that was not Year 2000 compliant.
Ascent expects to incur total costs of less than $25,000 to become Year 2000
compliant.
Ascent does not presently believe that the Year 2000 issue will pose
significant operational problems for it. However, if Ascent does not properly
identify all Year 2000 issues, or assessment, remediation and testing are timely
effected with respect to Year 2000 problems that are identified, there can be no
assurance that the Year 2000 issue will not have a material adverse effect on
Ascent's business, financial position, results of operations or cash flows or
adversely affect Ascent's relationships with customers, suppliers or others.
Ascent has not yet developed a contingency plan for dealing with the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from failure by Ascent and certain third parties to
achieve Year 2000 compliance on a timely basis. Ascent currently plans to
complete its analysis of the problems and costs associated with the failure to
achieve Year 2000 compliance and to establish a contingency plan in the event of
such failure by June 30, 1999.
The foregoing assessment of the impact of the Year 2000 problem on Ascent
is based on management's best estimates as of the date of this quarterly report,
which are based on numerous assumptions as to future events. There can be no
assurance that these estimates will prove accurate, and actual results could
differ materially from those estimated if these assumptions prove inaccurate.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward-looking
statements. For this purpose any statements herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors That May Affect Future Results" of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48, also known as FRR 48, "Disclosure of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments". FRR 48 requires disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those required under generally accepted accounting principles.
In the ordinary course of business, Ascent is exposed to interest rate
risk for its subordinated notes. At March 31, 1999, the fair market value of
these notes was estimated to approximate carrying value. Market risk was
estimated as the potential increase in fair value resulting from a hypothetical
10% decrease in the Company's weighted average short-term borrowing rate at
March 31, 1999, which was not materially different from the quarter-end carrying
value.
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 16 for a list of exhibits filed as
part of this Quarterly Report on Form 10-Q, which Exhibit Index
is incorporated herein by reference.
b) Reports on Form 8-k
1. On January 8, 1999, the Company filed a Current Report on
Form 8-K with the Securities and Exchange Commission announcing
that it had received a Not-approvable letter from the United
States Food and Drug Administration (the "FDA") on the Company's
New Drug Application for its acetaminophen extended release
product, Feverall Extended Release Sprinkles. In the
Not-approvable letter, the FDA primarily referred to
deficiencies relating to the manufacture and packaging of the
product.
2. On February 22, 1999, the Company filed a Current Report on
Form 8-K with the Securities and Exchange Commission announcing
(i) the execution, on February 16, 1999, of a series of
agreements with Alpharma relating to the Company's strategic
alliance with Alpharma and (ii) certain related amendments to
the Series G Securities Purchase Agreement.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASCENT PEDIATRICS, INC.
Date: May 17, 1999 By: /s/ JOHN G. BERNARDI
---------------------------------------
John G. Bernardi, Vice-President Finance
and Treasurer (Principal Financial Officer)
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Exhibit Index
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
99 Pages 37 through 47 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 as filed
with the Securities and Exchange Commission (which is
not deemed filed except to the extent that portions
thereof are expressly incorporated by reference therein)
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Exhibit 99
these estimates will prove accurate, and actual results could differ materially
from those estimated if these assumptions prove inaccurate.
RECENT PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5 "Accounting for the Costs of Start-Up Activities", referred to as SOP 98-5.
SOP 98-5 requires all costs of start-up activities (as defined by SOP 98-5) to
be expensed as incurred. This statement is effective for periods beginning after
December 15, 1998. Ascent does not believe SOP 98-5 will have a significant
impact on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, known as SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters beginning after
June 15, 1999. Ascent will adopt SFAS 133 by January 1, 2000. Ascent does not
believe that SFAS 133 will have a significant impact on its financial statement
disclosure.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause THE
COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARDING-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE
SET FORTH BELOW UNDER THE CAPTION "CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS."
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF ORAPRED SYRUP
In April 1997, we filed two Abbreviated New Drug Applications, or
ANDAs, with the FDA covering 5mg/5ml and 15mg/5ml formulations of Orapred syrup.
In October 1998, the FDA issued a deficiency letter on chemistry, manufacturing
and controls which cited certain deficiencies with both ANDAs. In January 1998,
we amended the ANDA for the stronger formulation of Orapred to address the
issues raised by the FDA. The FDA is currently reviewing this ANDA. The FDA may
not approve this ANDA on a
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timely basis or at all. The failure of the FDA to
approve one of these ANDAs or a significant delay in such approval would have a
material adverse effect on our business.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF PRIMSOL TRIMETHOPRIM SOLUTION
In 1996, we filed a New Drug Application, or NDA, with the FDA covering
a 50mg formulation of Primsol trimethoprim solution, an antibiotic for the
treatment of middle ear infection. In February 1998, we received a letter from
the FDA citing deficiencies in this NDA, and, in August 1998, the FDA notified
us that we would be required to conduct additional clinical trials to evaluate
the safety of the 50mg formulation of Primsol solution, due to the inclusion in
this formulation of maltitol, an inactive ingredient. In September 1998, the FDA
indicated that we would not be required to conduct these clinical trials if we
removed maltitol from the formulation, and, in December 1998, we filed an
amendment to the NDA for the 50mg formulation of Primsol solution removing
maltitol. The FDA is currently reviewing this NDA. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or a
significant delay in such approval would have a material adverse effect on our
business.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF FEVERALL CONTROLLED RELEASE
SPRINKLES
In December 1997, we filed an NDA for Feverall controlled-release
sprinkles, an acetaminophen product for the treatment of pain and fever in
children. In December 1998, the FDA issued a not-approvable letter covering this
NDA which cited deficiencies relating to the manufacture and packaging of this
product. The letter also indicated that the clinical trials of Feverall
sprinkles did not demonstrate adequate duration of action and that the product
should only be used in patients older than two years of age. We are currently in
discussions with the FDA regarding these issues. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or a
significant delay in such approval would have a material adverse effect on our
business.
THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of Orapred syrup, Primsol solution, Feverall
sprinkles, and Pediavent albuterol controlled-release suspension, a prescription
product for the treatment of asthma for which we expect to file an NDA in the
second quarter of 1999, will depend upon their acceptance by pediatricians,
pediatric nurses and third party payors as clinically useful, cost-effective and
safe. Factors that we believe will materially affect market acceptance of these
products include:
* the receipt and timing of FDA approval;
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* the timing of market introduction of our products and competing
products;
* the safety, efficacy, side effect profile, taste, dosing and ease
of administration of the product;
* the patent and other proprietary position of the product;
* brand name recognition; and
* price.
The failure of any of Orapred syrup, Primsol solution, Feverall sprinkles or
Pediavent to achieve market acceptance could have a material adverse effect on
our business.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At December 31, 1998,
our accumulated deficit was approximately $51.1 million. We received our first
revenues from product sales only in July 1997. We expect to incur additional
significant operating losses over the next 12 months and expect cumulative
losses to increase as our research and development, clinical trial and marketing
efforts expand. We expect that our losses will fluctuate from quarter to quarter
based upon factors such as our product acquisition and development efforts,
sales and marketing initiatives, competition and the extent and severity of
illness during cold and flu seasons. These quarterly fluctuations may be
substantial.
WE MAY REQUIRE ADDITIONAL FUNDING AND OUR LOAN AGREEMENT WITH ALPHARMA RESTRICTS
OUR ABILITY TO DO SO
We anticipate that, based upon our current operating plan (including
internally generated funds), and our existing capital resources, we will require
approximately $8.0 million of additional funds to meet our capital requirements
through the first quarter of 2000, at which point we currently believe that we
will be able to rely on internally generated funds to fund operating expenses.
This amount does not take into account the $4.0 million borrowed from Alpharma
on February 19, 1999 or the additional $8.0 million which we may borrow from
Alpharma, subject to stockholder approval of the merger, for general corporate
purposes under the Loan Agreement dated February 16, 1999 by and among Ascent,
Alpharma and Alpharma, Inc. If our stockholders approve the merger, we expect to
borrow this $8.0 million from Alpharma under the loan agreement (including the
$4.0 million borrowed on February 19, 1999). If our business does not progress
in accordance with our current operating plan, if our stockholders do not
approve the merger or if we do not consummate the strategic alliance with
Alpharma, we may need to raise additional funds, including through collaborative
relationships and public or private financings. The additional financing may not
be available to us or may not be available on acceptable terms.
Although the loan agreement with Alpharma gives us access to $28.0
million for acquisitions of companies and products that meet specified criteria
and for funding research and development, it places numerous restrictions on our
ability to raise additional capital, including restrictions on the type and
amount of securities that we may issue and the use of proceeds of any debt or
equity financing. These restrictions
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apply particularly in the context of raising capital for general corporate
purposes, such as funding operating expenses.
If we are unable to obtain adequate funding on a timely basis, we may
need to significantly curtail one or more of our research or product development
programs or reduce our marketing and sales initiatives, or we may be unable to
effect strategic acquisitions. We may also need to seek funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to technologies, product candidates or products which we would
otherwise pursue on our own. Any of such cases would have a material adverse
effect on our business.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT
We were founded in March 1989 and only introduced our first products
into the market in the second half of 1997. All but two of our products are in
research or development. The products that we have not yet completed developing
may require, depending on the development status of the product, additional
research and development, extensive preclinical studies and clinical trials and
regulatory approval prior to any commercial sales.
WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS
We have introduced only one internally-developed product, Pediamist
nasal saline spray, into the market. Although we have completed development of
products and have filed applications with the FDA for marketing approval, many
of our product candidates are in development and require additional formulation,
preclinical studies, clinical trials and regulatory approval prior to any
commercial sales. We must successfully address a number of technological
challenges to complete the development of our potential products. These products
may have undesirable or unintended side effects, toxicities or other
characteristics that may prevent or limit commercial use.
WE HAVE ONLY LIMITED SALES AND MARKETING EXPERIENCE
We market and sell our products in the United States through our own
dedicated marketing staff and sales force. We recruited this marketing staff and
sales force in the second half of 1997 and have only limited experience in
marketing and sales. We believe that our success depends in significant part
upon our ability to maintain a dedicated marketing staff and sales force capable
of promoting our products.
WE FACE SIGNIFICANT COMPETITION IN THE PEDIATRIC PHARMACEUTICAL INDUSTRY
The pediatric pharmaceutical industry is highly competitive and
characterized by rapid and substantial technological change. We may be unable to
successfully compete in this industry. Our competitors include several large
pharmaceutical companies that market pediatric products in addition to products
for the adult market, including Glaxo
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Wellcome Inc., Eli Lilly and Company, the Ortho-McNeil Pharmaceutical Division
of Johnson & Johnson, Inc. and the Ross products Division of Abbot Laboratories
Inc.
We expect to market many of our product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. Our product candidates also will
compete with products that do not contain the same active ingredient but are
used for the same indication and are well entrenched within the pediatric
market. Moreover, many of our potential products that are reformulations of
existing drugs of other manufacturers may have significantly narrower patent or
other competitive protection.
Particular competitive factors that we believe may affect us include:
* many of our competitors have well known brand names that have
been promoted over many years;
* many of our competitors offer well established, broad product
lines and services which we do not offer; and
* many of our competitors have substantially greater financial,
technical and human resources than we have, including greater
experience and capabilities in undertaking preclinical studies
and human clinical trials, obtaining FDA and other regulatory
approvals and marketing pharmaceuticals.
WE MAY BE UNSUCCESSFUL WITH OUR CLINICAL TRIALS
In order to obtain regulatory approvals for the commercial sale of any
of our products under development, we will be required to demonstrate through
preclinical testing and clinical trials that the product is safe and
efficacious.
The results from preclinical testing and early clinical trials of a
product that is under development may not be predictive of results that will be
obtained in large-scale later clinical trials.
The rate of completion of our clinical trials is dependent on the rate
of patient enrollment, which is beyond our control. We may not be able
successfully to complete any clinical trial of a potential product within a
specified time period, if at all, including because of a lack of patient
enrollment. Moreover, clinical trials may not show any potential product to be
safe or efficacious. Thus, the FDA and other regulatory authorities may not
approve any of our potential products for any indication.
If we are unable to complete a clinical trial of one of our potential
products, if the results of the trial are unfavorable or if the time or cost of
completing the trial exceeds
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our expectation, our business, financial condition or results of operations
could be materially adversely affected.
WE MAY NOT OBTAIN OR MAINTAIN REGULATORY APPROVALS
The production and the marketing of our products and our ongoing
research and development activities are subject to extensive regulation by
federal, state and local governmental authorities in the United States and other
countries. If we fail to comply with applicable regulatory requirements, we may
be subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.
Clearing the regulatory process for the commercial marketing of a
pharmaceutical product takes many years and requires the expenditure of
substantial resources. We have had only limited experience in filing and
prosecuting applications necessary to gain regulatory approvals. Thus, we may
not be able to obtain regulatory approvals to conduct clinical trials of or
manufacture or market any of our potential products.
Factors that may affect the regulatory process for our product
candidates include:
* our analysis of data obtained from preclinical and clinical
activities is subject to confirmation and interpretation by
regulatory authorities, which could delay, limit or prevent
regulatory approval;
* we or the FDA may suspend clinical trials at any time if the
participants are being exposed to unanticipated or unacceptable
health risks; and
* any regulatory approval to market a product may be subject to
limitations on the indicated uses for which we may market the
product. These limitations may limit the size of the market for
the product.
As to products for which we obtain marketing approval, we, the
manufacturer of the product, if other than us, and the manufacturing facilities
will be subject to continual review and periodic inspections by the FDA. The
subsequent discovery of previously unknown problems with the product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
We also are subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of our products. The approval procedure varies among
countries. The time required to obtain foreign approvals often differs from that
required to obtain FDA approval. Approval by the FDA does not ensure approval by
regulatory authorities in other countries.
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WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS
We have no manufacturing facilities. Instead, we rely on third parties
to manufacture our products in accordance with current "good manufacturing
practice" requirements prescribed by the FDA. For example, we rely on
Upsher-Smith Laboratories, Inc. for the manufacture of Feverall acetaminophen
rectal suppositories. In addition, we rely on third parties for the manufacture
of our product candidates for clinical trials and for commercial sale following
FDA approval of the product. For example, we rely on Lyne Laboratories, Inc. for
the manufacture of Primsol solution and upon Recordati S.A. Chemical and
Pharmaceutical Company for the manufacture of Pediavent.
We expect to be dependent on third party manufacturers or collaborative
partners for the production of all of our products. There are a limited number
of manufacturers that operate under the FDA's good manufacturing practice
requirements and capable of manufacturing our products. In the event that we are
unable to obtain contract manufacturing, or obtain manufacturing on commercially
reasonable terms, we may not be able to commercialize our products as planned.
We have no experience in manufacturing on a commercial scale and no
facilities or equipment to do so. If we determine to develop our own
manufacturing capabilities, we will need to recruit qualified personnel and
build or lease the requisite facilities and equipment. We may not be able to
successfully develop our own manufacturing capabilities. Moreover, it may be
very costly and time consuming for us to develop the capabilities.
WE ARE DEPENDENT UPON SOLE SOURCE SUPPLIERS FOR OUR PRODUCTS
Some of our supply arrangements require that we buy all of our
requirements of a particular product exclusively from the other party to the
contract. Moreover, for many of our products, we have qualified only one
supplier. Any interruption in supply from any of our suppliers or their
inability to manufacture our products in accordance with the FDA's good
manufacturing requirements may adversely affect us in a number of ways,
including:
* we may not be able to meet commercial demands for our products;
* we may not be able to initiate or continue clinical trials of
products that are under development; and
* we may be delayed in submitting applications for regulatory
approvals of our products.
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WE INTEND TO PURSUE STRATEGIC ACQUISITIONS WHICH MAY BE DIFFICULT TO INTEGRATE
As part of our overall business strategy, we intend to pursue strategic
acquisitions that would provide additional product offerings. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt under the
Alpharma loan agreement or otherwise or amortization expenses related to the
goodwill and other intangible assets, any of which could have a material adverse
effect on our business. In addition, acquisitions involve numerous risks,
including:
* difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
* the diversion of management's attention from other business
concerns; and
* the potential loss of key employees of the acquired company.
From time to time, we have engaged in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
OUR SUCCESS DEPENDS ON OBTAINING PATENTS
Our success depends upon us obtaining patents to protect our products.
As a pharmaceutical company, our patent position involves complex legal and
factual questions. As a result, patents may not issue from any patent
applications that we own or license and, if issued, may not be sufficiently
broad to protect our technology.
Because our product candidates are reformulations of existing
off-patent drugs, any patent protection afforded to the products will be
significantly narrower than a patent on the active ingredient itself. In
particular, we do not expect that the active ingredients of our products will
qualify for composition-of-matter patent protection.
We are aware of patents and patent applications belonging to
competitors and others that may require us to alter our products or processes,
pay licensing fees or cease certain activities. We may not be able to obtain a
license to any technology owned by a third party that we require to manufacture
or market one or more products. Even if we can obtain a license, the financial
and other terms may be disadvantageous.
WE MAY BECOME INVOLVED IN PROCEEDINGS RELATING TO INTELLECTUAL PROPERTY RIGHTS
Because our products are based on existing compounds rather than new
chemical entities, we may become parties to patent litigation and interference
proceedings. The types of situations in which we may become parties to
litigation or proceedings include:
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* we may initiate litigation or other proceedings against third
parties to enforce our patent rights;
* we may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by them or to
obtain a judgment that our products or processes do not infringe
their patents;
* if our competitors file patent applications that claim technology
also claimed by us, we may participate in interference or
opposition proceedings to determine the priority of invention; or
* if third parties initiate litigation claiming that our processes
or products infringe their patent or other intellectual property
rights, we will need to defend against such proceedings.
An adverse outcome in any litigation or interference proceeding could
subject us to significant liabilities to third parties and require us to cease
using the technology that is at issue or to license the technology from third
parties. We may not be able to obtain any required licenses on commercially
acceptable terms or at all. Thus, an unfavorable outcome in any patent
litigation or interference proceeding could have a material adverse effect on
our business, financial condition or results of operations.
The cost to us of any patent litigation or interference proceeding,
even if resolved in our favor, could be substantial. Uncertainties resulting
from the initiation and continuation of patent litigation or interference
proceedings could have a material adverse effect on our ability to compete in
the marketplace. Patent litigation and interference proceedings may also absorb
significant management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION
We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various commercialization, sublicensing, royalty,
insurance and other obligations on us. If we fail to comply with these
requirements, the licensor will have the right to terminate the license.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE CANNOT ADEQUATELY PROTECT OUR
PROPRIETARY KNOW-HOW
We must maintain the confidentiality of our trade secrets and other
proprietary know-how. We seek to protect this information by entering into
confidentiality agreements with our employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors. These agreements may
be breached by the other party. We may not be able to obtain an adequate, or
perhaps, any remedy to
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<PAGE> 10
remedy the breach. In addition, our trade secrets may otherwise become known or
be independently developed by our competitors.
THE PRICING OF OUR PRODUCTS IS SUBJECT TO DOWNWARD PRESSURES
The availability of reimbursement by governmental and other third party
payors affects the market for our pharmaceutical products. These third party
payors continually attempt to contain or reduce healthcare costs by challenging
the prices charged for medical products and services. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control.
If we obtain marketing approvals for our products, we expect to
experience pricing pressure due to the trend toward managed healthcare, the
increasing influence of health maintenance organizations and additional
legislative proposals. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope or amount.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of pharmaceuticals.
Product liability claims might be made by consumers, health care providers or
pharmaceutical companies or others that sell our products. If product liability
claims are made with respect to our products, we may need to recall the products
or change the indications for which they may be used. A recall of a product
would have a material adverse effect on our business, financial condition and
results of operations.
WE HAVE LIMITED PRODUCT LIABILITY COVERAGE AND WE MAY NOT BE ABLE TO OBTAIN IT
IN THE FUTURE
Our product liability coverage is expensive and we have purchased only
limited coverage. This coverage is subject to various deductibles. In the
future, we may not be able to maintain or obtain the necessary product liability
insurance at a reasonable cost or in sufficient amounts to protect us against
losses. Accordingly, product liability claims could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON A FEW KEY EMPLOYEES WITH KNOWLEDGE OF THE PEDIATRIC
PHARMACEUTICAL INDUSTRY
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Clemente, the chairman of our board of
directors. The loss of the services of any of these individuals could have a
material adverse effect on
-46-
<PAGE> 11
our business. We do not carry key-man insurance with respect to any of our
executive officers other than Dr. Clemente.
WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL WITH KNOWLEDGE OF
DEVELOPING AND MANUFACTURING PEDIATRIC PHARMACEUTICALS
Recruiting and retaining qualified scientific personnel to perform
research and development is critical to our success. Our anticipated growth and
expansion into areas and activities requiring additional expertise are expected
to require the addition of new management personnel and the development of
additional expertise by existing management personnel. We may not be able to
attract and retain highly skilled personnel on acceptable terms given the
competition for experienced scientists among pharmaceutical and health care
companies, universities and non-profit research institutions. In addition, the
existence of the call option and the resulting uncertainty as to whether we will
be acquired by Alpharma may dissuade highly skilled personnel from accepting
employment with or remaining employed by us.
OUR PROMOTION ARRANGEMENTS DEPEND ON THE SUPPORT OF OUR COLLABORATORS
We plan to enter into arrangements to promote some pharmaceutical
products of third parties to pediatricians in the United States. For example, in
November 1998, we entered into a promotion agreement with Warner-Lambert Company
to market Omnicef(R) (cefdinir), a product licensed by Warner-Lambert Company
from Fujisawa Pharmaceutical Co., Ltd. The success of any arrangement is
dependent on, among other things, the third party's commitment to the
arrangement, the financial condition of the third party and market acceptance of
the third party's products.
WE ARE DEPENDENT UPON A THIRD PARTY DISTRIBUTOR
We distribute our products through a third party distribution
warehouse. We have no experience with the distribution of products and rely on
the third party distributor to perform order entry, customer service and
collection of accounts receivable on our behalf. The success of this arrangement
is dependent on, among other things, the skills, experience and efforts of the
third party distributor.
UNCERTAINTY OF HEALTHCARE REFORM MEASURES
In both the United States and some foreign jurisdictions, there have
been a number of legislative and regulatory proposals to change the healthcare
system. Further proposals are likely. The potential for adoption of these
proposals affects and will affect our ability to raise capital, obtain
additional collaborative partners and market our products.
-47-
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